new highs mask many problems

Wyld stallyns!
Commentary: New highs mask many problems
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Last Update: 4:02 AM ET Oct 4, 2006


"The air is clean. The water is clean. Even the dirt... is clean. Bowling averages are way up. Mini-golf scores are way down." -- Rufus, 'Bill & Ted's Excellent Adventure'
Editor's note: Todd Harrison is founder and CEO of Minyanville.
NEW YORK (MarketWatch) -- And so it is. October 3rd, 2006 has staked its claim as the "best" day in market history. So says a select sect of thirty stocks that has market pundits and media circles chasing the race to keep pace with the Dow Joneses.
Forget, for a moment, that over 70% of the index composition is 20% off their all-time high and a staggering 57% are more than 30% below their respective high water marks.


And excuse, if you will, that only JP Morgan (JPM : jp morgan chase & co com
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Last: 47.75+0.88+1.88%

7:12am 10/04/2006

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JPM47.75, +0.88, +1.9%) is making an all-time--or even a 52-week--high.
On Wall Street, you're only as good as your last trade and this latest tick is rife with performance anxiety.
We've spoken at length about the rising tide of reflation that lifted asset class boats since the back of the tech bubble. And when the widely watched commodity index broke its five-year uptrend in late August, we were (thus far incorrectly) on alert for equities to follow suit.
But here we are, more than a month later, with commodities down an additional 10% and the broader market, as measured by the Dow Jones, grabbing more headlines than Paris Hilton.
So what gives?
The truth lies in the transition between what was (inflation concerns) and what will be (a global slowdown). That chasm has investors giddy with visions of Goldilocks as we dance through this perceived market sweet spot.
A wise man once said that trading, in its most basic form, is an attempt to capture the disconnect between perception and reality. While the former is currently rewarding those in the right vehicles, the latter matter is a more delicate mix.
Of all the primary trading metrics (fundamentals, technicals, structural and psychology), matters of the mind are the most intangible. We can eyeball technical levels, track the business climate and dutifully monitor the mechanical underpinnings but when it comes to sentiment, it's subjective at best and, at worst, filled with falsehood.
If there are three psychological phases to each trading move (denial, migration & panic), we must ascertain the current diagnosis. The ability to identify the relative position in that dynamic can help formulate a proper and profitable strategy.
The bulls opine that this latest phase is an upside migration on the way to a year-end performance driven panic. Liquidity is the absolute arbiter, they'll argue, and money continues to rotate among sectors in an orderly fashion.
The bears, for their part, will point to the inverted yield curve, narrow participation, compressed volatility and eye-popping imbalances. To them, the recent headlines serve only to reinforce that we're in the early stages of widespread denial.
From a risk management standpoint, we must allow -- and prepare -- for both scenarios. We're all pawns in this minxy game and the market, as the world's largest casino, has deeper pockets than we do. Alotta folks seem to be having fun at the tables, however, and that, perhaps, is worth noting as we count our chips and make new bets.
We've been conditioned to seek reward when the screens are green and duck for cover during crimson tides. If we've learned anything through the years -- through the cycles, phases, trends and nuances that litter the market landscape - it's that this process is a bit backwards.
The best risk/reward arrives when the market is on its heels and, ergo, widespread acceptance often allows for the most advantageous exit strategy.
Sure, there might be gas left in the bovine tank but one thing is for certain. With the bullish bent being broadcast from every available media orifice, further gains likely won't catch investors by surprise.
Good luck today.
Editor's note: Harrison has a position in JP Morgan